Market Update | Record Highs in the Rearview, Turbulence Ahead

U.S. equity markets pushed to new all-time highs early in July, but leadership beneath the surface continued to shift as investors rotated away from semiconductor and AI-linked stocks and toward more diversified areas of the market. Weak labor market data, moderating economic growth, persistent inflation pressures, a contentious Federal Reserve meeting and renewed Middle East tensions created volatility throughout the month. The Dow Jones Industrial Average returned 0.4% for the month, with the S&P 500 and the technology-heavy NASDAQ down 0.1% and 3.2% respectively. All three indexes remain strongly positive on the year, with respective returns of 10.2%, 10.1% and 9.2%. International developed markets, as measured by the MSCI EAFE Index, returned 2.0%, while the MSCI Emerging Markets Index was down 3.1%. On the fixed income side, the Bloomberg U.S. Aggregate Bond Index fell 1.3% as Treasury yields moved higher, with the 10-year Treasury yield ending the month at 4.75%, up from 4.44% at the end of June.

The month began with a jolt from the labor market when the Bureau of Labor Statistics released the June employment report on July 2, showing nonfarm payrolls grew by just 57,000, roughly half of consensus expectations and the softest reading in several months. The unemployment rate edged down to 4.2%, but that improvement was partly attributable to a meaningful decline in labor force participation rather than broad-based job growth. The report reinforced a broader narrative that has been built throughout 2026 of positive economic growth that is gradually losing momentum.

On the inflation front, the June Consumer Price Index (CPI) report released in July offered welcome, but cautious, relief. Headline CPI fell a seasonally adjusted 0.4% for the month, its steepest monthly decline since April 2020, bringing the annual inflation rate down to 3.5% from 4.2% in May. Core CPI, which excludes volatile food and energy prices, was flat on a monthly basis and decelerated to 2.6% year-over-year. More importantly, the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, declined 0.1% in June and rose 3.7% from a year earlier, while Core PCE increased just 0.1% during the month and 3.3% year-over-year. Although inflation has moderated from recent highs, both PCE measures remain above the Federal Reserve's 2% target, reinforcing the Fed's continued cautious approach to monetary policy.

The Federal Reserve held its benchmark interest rate steady at 3.50% to 3.75% at its July meeting, marking the fifth consecutive meeting without a policy change. The decision featured an unusual 9-3 vote, with three members dissenting in favor of a rate increase. Chair Kevin Warsh reiterated that inflation remains above target and offered little guidance on the future path of policy, contributing to a rise in long-term Treasury yields as investors reassessed the likelihood and timing of future Fed actions.

Earnings season highlighted a growing divide between mixed technology fundamentals and investor expectations. Markets increasingly demanded evidence that significant AI-related capital expenditures would generate meaningful returns. As a result, semiconductor and AI-linked stocks that had led much of the market's advance faced increased scrutiny, while investors showed greater interest in companies demonstrating earnings durability, free cash flow generation and disciplined capital allocation. Apple's ascent to become the world's most valuable public company reflected this shift in late July, as investors rewarded a more measured approach to AI spending relative to several of its peers. The changing market backdrop was also evident in broader market participation. Through July 20, there had been 52 trading days during 2026 where the S&P 500 moved in one direction while a majority of its constituents moved in the other, highlighting a growing divergence between index performance and underlying market breadth.

Geopolitical risks also reasserted themselves during the month, most notably in the Middle East. After signs of easing tensions contributed to the decline in energy prices during June, renewed hostilities involving Iran and U.S. interests reintroduced uncertainty into global energy markets. Oil prices rebounded sharply during portions of July, with Brent crude climbing back above $100 per barrel mid-month, raising concerns that the inflation relief provided by lower energy costs could prove temporary. The unpredictable nature of the conflict remains an important risk for both inflation and economic growth moving forward.

The advance estimate of second-quarter GDP showed the U.S. economy expanded at an annualized rate of 1.5%, down from 2.1% in the first quarter. While the headline figure pointed to moderating growth, the details beneath the surface were more encouraging. Consumer spending accelerated to a 3.2% pace, business investment remained strong and a measure of underlying private-sector demand reached its fastest growth rate since early 2023. Much of the drag on headline GDP came from a surge in imports, particularly technology equipment and semiconductors tied to the ongoing AI buildout, which subtract from GDP calculations despite supporting business investment and economic activity.

July served as a reminder that record highs do not eliminate risk. Although the economy remains resilient, the backdrop facing investors has become increasingly complex. Economic growth is moderating, inflation remains above the Federal Reserve's target and investors are increasingly demanding evidence that elevated valuations and substantial AI-related investments can be supported by future earnings growth. Ongoing uncertainty in the Middle East continues to carry implications for energy prices and inflation, while a Federal Reserve that has provided limited clarity regarding its policy path leaves markets particularly sensitive to incoming economic data. As investors gradually begin turning their attention toward the 2026 midterm election cycle, the remainder of the year may prove more dependent on earnings growth, economic fundamentals and policy developments than the relatively narrow group of companies that has driven much of the market's advance. Together, these factors may create a more challenging backdrop than the one investors have enjoyed for much of the year.

Legal Update | IRS Issues Proposed Rules on Employer Contributions to Trump Accounts

Although Trump Accounts are not retirement plan benefits, they are a newly available employee benefit that may be of interest to some employers seeking to enhance their benefits offerings. Given the recent release of IRS and DOL guidance, we wanted to make plan sponsors aware of these developments and the issues employers should consider before implementing a Trump Account Contribution Program.

On August 11, 2026, the IRS released proposed regulations providing long-awaited guidance for employers interested in making contributions to Trump Accounts through employer-sponsored Trump Account Contribution Programs (TACPs). The proposal also addresses how nondiscrimination testing rules apply to these programs. Separately, the Department of Labor (DOL) issued guidance confirming that most TACPs generally will not be subject to ERISA.

Background

Trump Accounts were created under the One Big Beautiful Bill Act (OBBBA) through new Internal Revenue Code Section 530A. These accounts are traditional IRAs established for eligible children under age 18, with contributions permitted beginning July 4, 2026. The law also added Code Section 128, allowing employers to contribute up to $2,500 annually on a tax-favored basis to an employee's Trump Account or to the Trump Account of the employee's dependent through a TACP.

Key Proposed Requirements for Employers

The proposed regulations outline several requirements for employers wishing to sponsor a TACP, including:

• Maintaining a written plan document describing eligibility, contribution provisions, administrative procedures and correction methods.
• Providing employees with notice regarding the availability and terms of the program.
• Reporting contributions to employees, generally through Form W-2 reporting.
• Establishing procedures to certify that contributions are being made to eligible Trump Accounts.
• Complying with nondiscrimination requirements intended to prevent the program from disproportionately benefiting highly compensated employees (HCEs).

Important Clarifications

Among the most notable provisions, the proposed rule confirms:

• The $2,500 annual contribution limit applies on a per-employee basis, not per dependent.
• Sole proprietors, partners, more-than-2% S corporation shareholders and certain directors are not eligible to participate.
• Employer contributions remain subject to FICA and FUTA taxes even though they are generally excluded from employees' taxable income.
• Employers may not restrict contributions to Trump Accounts held by specific trustees.

Nondiscrimination Testing

The proposed regulations apply three nondiscrimination tests similar to those used for dependent care assistance programs:

1. Contribution and Benefits Test
2. Eligibility Test
3. 55% Average Benefits Test

The proposal also includes a special safe harbor that permits employers to match the initial federal government contribution to eligible dependent Trump Accounts without failing nondiscrimination testing, provided the matching contribution is made on the same terms and conditions for all eligible employees.

DOL Guidance: Most TACPs Not Subject to ERISA

In Technical Release 2026-02, the DOL clarified that employer contributions to a dependent's Trump Account generally do not create an ERISA-covered plan. Contributions made to an employee's own Trump Account may also avoid ERISA coverage if participation is completely voluntary and the employer does not exercise control over the account or investments.

Employer Considerations

Employers evaluating whether to implement a TACP should carefully review the proposed regulations, assess workforce interest, determine contribution strategies and coordinate with payroll, recordkeeping and nondiscrimination testing providers. Employers should also be prepared to adopt required plan documents and administrative procedures if they choose to move forward.